What Venture Capitalists Predict in the World of Fintech


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Fintech is no longer the enemy of banking. While much of the talk among fintech companies just a year or two ago was that they wanted to disrupt the dinosaurs of banking, now the tone has changed, said several speakers at the FinXTech Annual Summit Wednesday in New York City.

“I’ve seen a slight change in the business model, where it’s now about —How can we partner with the banks?’’’ said Jim Hale, the founding partner of FTV Capital, a venture capital firm. “The tone has changed.”

The event gathered more than 200 entrepreneurs and bankers together to discuss partnerships, financial technology and trends. Hale was one of several venture capitalists at the conference giving his perspective on future trends in financial technology and the challenges of partnering with banks.

In fact, many of the biggest banks, some of them in attendance, such as Wells Fargo & Co. and Citigroup, have started venture capital arms to invest in fintech startups, so they can learn and influence the direction of future technology.

The most active banks investing in fintech startups are Banco Santander, Goldman Sachs, Citigroup, Mizuho Financial Group and JPMorgan Chase & Co., according to a new report from CBInsights, which tracks financial technology investments globally.

The report said global venture capital funding and deal activity fell slightly in the first quarter compared to a year ago, but rose compared to the fourth quarter of 2016, a trend that venture capitalist Ryan Gilbert, a partner at Propel Venture Partners, said was likely the result of uncertainty brought on by Brexit and the U.S. presidential election.

There were 226 venture-backed investments in financial technology companies globally in the first quarter of 2017, receiving $2.7 billion in funding, compared to 256 investments and $4.9 billion in the first quarter of 2016, according to CBInsights. In the U.S., there were 90 deals financed in the first quarter with $1.1 billion in cash, compared to 137 in the first quarter of last year at $1.8 billion.

Hale estimated that 90 percent of fintech companies focus directly on consumers, but he is more interested in funding solutions that solve the back-office problems and infrastructure needs of banks. He is also interested in solutions that manage data quicker, faster and cheaper than current solutions do.

Gregg Schoenberg, the founder of Westcott Capital, said he sees opportunity to make asset management more efficient, since the cost structure in these organizations is high. Banks also have a tremendous amount of data on their customers and could use that more effectively. Few other industries are required by law to collect as much data on their customers as banks are, which have to meet know-your-customer and anti-money laundering mandates, he said.

For examples of how technology can create more efficient processes, banks might look to successful companies such as Domino’s Pizza, which has a high stock price not based on the quality of its pizza, but by its distribution system, Schoenberg said. The company has a robotics division and 17 different ways to order a pizza, he added.

Gilbert is looking to invest in emerging technologies such as voice recognition and artificial intelligence, enabling capabilities like having conversations anytime with your “banker” in the form of a chat bot, for example.

“That’s really rethink and rebuild,” he said. Gilbert is often more excited about innovation happening outside the U.S., such as Singapore, a country with a lot of wealth and a stable, central regulator, and where banks are using chat bots and voice recognition software.

In the U.S., there are more hurdles, and multiple regulatory bodies for the banking industry, including federal and state agencies. Just yesterday, the Conference of State Bank Supervisors sued the Office of the Comptroller of the Currency over the latter’s proposal to regulate fintech firms.

Still, Gilbert is not pessimistic. “Now is not the time to give up,’’ he said in an interview yesterday. “We have 5,800 banks and there are a lot of opportunities to turn these institutions into great things. Technology is developing at such a rapid pace. The best is yet to come.”

M&A in Fintech: A Sideshow Worth Watching


startup-10-14-15.pngIt’s no secret that what has been happening in the fintech space is attracting more attention from the world of banking. It’s hard to ignore the fact that venture capital invested $10 billion in fintech startups in 2014, compared to just $3 billion in 2013, according to an Accenture analysis of CB Insights data.

But watching M&A in the fintech space shows that these startups are much more likely to pair with others or get acquired by incumbents than they are to go public with an initial public offering, as noted by bank analyst Tai DiMaio in a KBW podcast recently.

“Together, through partnerships, acquisitions or direct investments, you can really have a situation where both parties benefit [the fintech company and the established player],’’ he says.

That may lend credence to my initial suspicions that there are more opportunities in fintech for banks than threats to established players and that these startups really need to pair up to be successful.

Take BlackRock’s announcement in August that it will acquire FutureAdvisor, a leading digital wealth management platform with technology-enabled investment advice capabilities (a so-called “robo advisor.”) With some $4.7 trillion in assets under management, BlackRock offers investment management, risk management and advisory services to institutional and retail clients worldwide—so this deal certainly caught my attention.

According to FT Partners, the investment bank that served as exclusive advisor to BlackRock, the combination of FutureAdvisor’s tech-enabled advice capabilities with Blackrock’s investment and risk management solutions “empowers partners to meet the growing demand among consumers to engage with technology to gain insights on their investment portfolios.” This should be seen as a competitive move to traditional institutions, as demand for such information “is particularly strong among the mass-affluent, who account for ~30 percent of investable assets in the U.S.”

Likewise, I am constantly impressed with Capital One Financial Corp., an institution that has very publicly shared its goal of being more of a technology company than a bank. To leapfrog the competition, Capital One is quite upfront in their desire to to deliver new tech-based features faster then any other bank. As our industry changes, the chief financial officer, Rob Alexander, opines that the winners will be the ones that become technology-focused businesses—and not remain old school banking companies. This attitude explains why Capital One was the top performing bank in Bank Director’s Bank Performance Scorecard this year.

Case-in-point, Capital One acquired money management app Level Money earlier this year to help consumers keep track of their spendable cash and savings. Prior to that, it acquired San Francisco-based design firm Adaptive Path “to further improve its user experience with digital.” Over the past three years, the company has also added e-commerce platform AmeriCommerce, digital marketing agency PushPoint, spending tracker Bundle and mobile startup BankOns. Heck, just last summer, one of Google’s “Wildest Designers” left the tech giant to join the bank.

When they aren’t being bought by banks, some tech companies are combining forces instead. Envestnet, a Chicago-based provider of online investment tools, acquired a provider of personal finance tools to banks, Yodlee, in a cash-and-stock transaction that valued Yodlee at about $590 million. By combining wealth management products with personal financial management tools, you see how non-banks are taking steps to stay competitive and gain scale.

Against this backdrop, Prosper Marketplace’s tie up with BillGuard really struck me as compelling. As a leading online marketplace for consumer credit that connects borrowers with investors, Prosper’s acquisition of BillGuard marked the first time an alternative lender is merging with a personal financial management service provider. While the combination of strong lending and financial management services by a non-bank institution is rare, I suspect we will see more deals like this one struck between non-traditional financial players.

There is a pattern I’m seeing when it comes to M&A in the financial space. Banks may get bought for potential earnings and cost savings, in addition to their contributions to the scale of a business. Fintech companies also are bought for scale, but they are mostly bringing in new and innovative ways to meet customers’ needs, as well as top-notch technology platforms. They often offer a more simple and intuitive approach to customer problems. And that is why it’s important to keep an eye on M&A in the fintech space. There may be more opportunity there than threat.